Don’t fiddle with super, says Cooper

Jeremy Cooper: There is a sort of inevitability about this. You have the dental scheme, Gonski, the national disability insurance scheme, commodity prices going down and new promises being made, so something has got to give.
Photo: Jessica Shapiro

The head of the federal government’s superannuation review has warned Labor against making a cash grab for $1.4 trillion in retirement savings, ­saying it would undermine confidence in the system.

Jeremy Cooper
said cutting tax concessions from self-managed super funds, which invest $440 billion, would drain money from the share-market into riskier and less productive investments.

The Weekend AFR revealed that the government is considering cutting tax breaks, particularly for self-managed funds, to bolster its budget surplus.

“This is the problem with the super system. The bigger it gets, the more of a handier balancing item it becomes," Mr Cooper told the AFR.

AFR
AFR

A member of the government’s Henry tax review, John Piggott, agreed that more change would erode certainty. “Knee-jerk changes to super policy have been more frequent in Australia than anywhere else in the world," Professor Piggott said.

The AFR has also learned that the government is considering changes to a popular strategy that helps workers over the age of 55 top up their super just before they retire, in addition to watering down the generous tax breaks for self-managed funds that invest in property, to help pay for new policies on education and disability.

But the superannuation industry is furious at any move to wind back tax breaks. The industry urged the government to look at the tax concessions on all savings products, including negative gearing and tax on interest income, before it changed super again.

“You have got to look at all the products and all the levers," said
Pauline Vamos
, chief executive of the Association of Superannuation Funds of Australia. “You don’t want regulatory arbitrage to discourage people from savings in super because it is about funding people’s retirement."

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Mr Cooper, now chairman of retirement incomes at Challenger Financial Services, said he was concerned that savers might shun super.

“There has been quite a lot of change over a relatively short time . . . There is always policy reasons but the net effect is that the average person forms the view that super is all very well, but if the rules keep changing all the time, people will just be less inclined to put their money in," he said.

“The benefits to Australia in having all this patient capital explains why we have a much bigger sharemarket than our GDP would otherwise suggest. If you cut down on that you have to ­consider where that money goes; do you go back to the bad old days, and you have to consider whether that is what you want?"

“The tendency of changes you make under pressure in a complex system is that you can just make one tweak for a good reason but you find in three years that a lot less money has gone into super and instead into leveraged real estate and other areas," Mr Cooper warned.

Professor Piggott, director at the Centre of Excellence in Population Ageing Research, said more changes eroded confidence in the system.

“Individuals are entitled to long-term certainty when they are engaging in life cycle saving, and successive governments have failed to provide that," he said.

SMSF Professionals Association of Australia chief
Andrea Slattery
said: “I cannot stress enough that further tinkering in the policy and design of super, creating barriers for certain sectors which are outperforming and which have lower costs, for no apparent reason, is unimaginable."

Ms Slattery said she was worried that the government seemed to be targeting property owned by self-managed funds. She said the rise in property investments by do-it-yourself schemes reflected the surge in the number of small businesses in Australia over the past 10 years.

One popular strategy used by DIY schemes is to buy an office or factory, which is leased by the trustee’s business. Ms Slattery also cautioned the government against putting any limits on the amount of money savers could have in super.

Superannuation Minister
Bill Shorten
is also considering changes to the popular “transition to retirement strategy".

This is a strategy whereby workers over the age of 55 can minimise their income tax by sacrificing some of their pre-tax salary into super and receiving a pension payment at the same time.

The system was designed to enable older workers to maintain their income while gradually shifting from full-time to part-time employment before quitting the workplace.

But these days it is being used by many highly paid older workers who are still in full-time employment.

It has been suggested the government might try to ensure that the strategy is only available for people who are genuinely reducing their work commitments ahead of retirement.

There are no official statistics on how many people use transition to retirement strategies, or how much they cost the government.

The opposition’s spokesman on super,
Mathias Cormann
, said changes to the way self-managed funds were taxed would send the wrong signal to savers. “Australians doing the right thing by working hard to achieve a self-funded retirement are going to be asked to pay the price for Labor’s reckless spending through increased taxes on saving," he said.

Senator Cormann pointed to the reductions in concessional contribution caps for super down from $50,000 and $100,000 under the Howard government to just $25,000 under Labor.

“Despite 26 new or increased taxes under Labor so far and despite some of the best terms of trade ever over the past four years they’ve delivered $174 billion of accumulated deficits and are now looking at a $120 billion budget black hole moving forward."

But Australian Institute of Super Trustees chief
Fiona Reynolds
said it was time that self-managed funds were reviewed, after Howard government changes saw billions flow into the sector.

“SMSFs are not regulated by the Australian Prudential Regulation Authority, they are regulated by the Tax Office," she said.

“The APRA regulated sector has been reviewed within an inch of its life and it is time for the same scrutiny to be applied to SMSFs."

The average SMSF has two members with an average balance of $900,000. The average balance of a not for profit fund member was less than $50,000 and clearly incentives needed to remain in place for those at the lower end, she said.

“In making any changes however the Government needs to understand that many older Australians have only had the benefit of 9 per cent super for a short period, have low balances and should not be disadvantaged. In addition the government already reduced the concessional amount that can be paid into super to $25,000 per year - this includes the superannuation guarantee," Ms Reynolds said.

Mr Cooper warned the growing super system had become an irresistible temptation for the Gillard government as it came under increasing budgetary pressure.

“This is the problem with the super system. The bigger it gets, the more of a handier balancing item it becomes," Mr Cooper said.

“There is a sort of inevitability about this. You have got the dental scheme, you have got Gonski, you have the NDIS [National Disability Insurance Scheme], you have got commodity prices going down and new promises being made, so something has got to give," Mr Cooper said.